Acting between now and 31 July could give your retirement income a major uplift.
Thousands of taxpayers received welcome news earlier this week after the government extended a vital deadline for making voluntary national insurance contributions (NICs).
The upshot is that you now have more time to plug any historic gaps in your state pension record, a big boost for anyone seeking to maximise their retirement income.
In a press release on 7 March, the government announced the original cut off for making certain voluntary NICs is being pushed back from 5 April 2023 to 31 July 2023.
Explaining the decision, Victoria Atkins, financial secretary to the Treasury said:
“We’ve listened to concerned members of the public and have acted. We recognise how important state pensions are for retired individuals, which is why we are giving people more time to fill any gaps in their national insurance record to help bolster their entitlement.”
You can normally only go back six years to fill gaps in your NI record.
For instance, you have until 5 April 2025 to make voluntary NICs for the 2018 to 2019 tax year.
But the government, as part of transitional arrangements to the new state pension, is allowing you to plug any incomplete years between April 2006 and April 2016, as long as you act before 31 July.
But while you have a few extra months to make up for lost time, you still don't have long.
Here we outline what’s going on and assess whether making voluntary NICs is worth your while.
Should I fill holes in my record?
While this will depend on your personal circumstances, in most cases it makes a lot of sense - as long as there are gaps to fill (More on that later).
The state pension is a valuable source of guaranteed income for the vast majority of retirees – getting the maximum amount can really make a difference to your retirement lifestyle; especially at the moment with prices rising at record pace.
The gap between the basic state pension and full state pension is around £2,250 a year, so over the course of your retirement this could amount to tens of thousands of pounds.
Under current rules, you need at least 35 years of qualifying NICs to receive the full state pension, which is currently £185.15 per week, and a minimum 10 qualifying years to get the basic amount of £141.85 a week.
A key benefit of the state pension is that it increases every year by the higher of inflation, wage increases or 2.5 per cent. This is called the triple lock, a phrase you may be familiar with. It’s been a big talking point recently.
As inflation is high right now, the state pension is receiving a double-digit boost from April, with the full amount rising to £203.85 a week. Meanwhile the basic amount is jumping to £156.20 a week.
Why are there gaps?
In short, if you’ve been in full-time work, either employed or self-employed, for most of your adult life then you should have paid enough NICs to qualify for the full state pension.
However, there could be several reasons why your NI record is patchy. You may have spent periods unemployed and not claimed benefits, been in low-paid work, or worked or lived abroad.
In some cases, even though you were off work, you might still get credit towards your NI record.
For instance, if you took a career break to raise children, you can still receive NI credit until the child reaches age 12 provided you claimed child benefit during this period.
How can I plug any gaps?
To find out where you stand, the first step is to get a state pension forecast, which will tell you how much state pension you should get, when you’ll get it, and how to boost it - if applicable.
If the forecast highlights any gaps in your record, the next step is to consider plugging them.
You can do this by making voluntary (class 3) NI contributions, which are paid at a fixed rate of £15.85 a week, rising to £17.45 from next
However, the extended deadline means the current rate of £15.85 will be honoured for contributions paid up to 31 July and not 5 April as originally planned.
When topping up your NI record, you should only pay what you need to. It doesn’t matter whether you’ve amassed 35 or 40 qualifying NI years, the full state pension payment is the same.
The same goes if your record is particularly light. You usually need at least 10 qualifying years of NICs to get any state pension, so unless voluntary contributions bring you up this level it might not be worth your while.
Any money you had earmarked may be better placed elsewhere, such as your private pension pot.
How else can I boost retirement income?
While the state pension provides valuable source of income in retirement, it alone is unlikely to be enough to meet your income needs.
If you want to retire on your own terms, it’s important to make the most of your workplace and/or private pensions.
From tax relief to matched contributions from your employer, pensions are a great way of moving you closer to your retirement goals.
If you need help choosing the right pension arrangement for you, whether that’s starting a new plan or consolidating existing pensions, then it’s wise to seek professional advice.
Click below to connect with a retirement expert today.
